Global gold prices have dipped below the $1,800 mark, and many analysts believe that the price of gold will continue to fall as governments around the world fear that the United States Federal Reserve will soon be forced to roll back its policy of quantitative easing. Those that are most fearful of the Fed’s policy include Japan, China, Saudi Arabia, India, Brazil, Canada, Australia, South Africa, and Mexico.
It is believed that the weak U.S. dollar, strong U.K. economy, and many other factors have contributed to the recent sell off in gold prices. Some speculate that these factors are set to change as many financial institutions and central banks to reevaluate their gold holdings.
Countries that hold large amounts of gold typically become more comfortable when economic conditions and assets decline, and then start withdrawing their reserves from the market. This can be attributed to the increasing size of these reserves, the relative safety of their holdings, and the potential for hefty gains when the markets rebalance. However, most countries such as China and Japan do not have a great deal of reserves, and when those countries lose confidence in the currency markets, they may decide to withdraw some of their gold holdings from the market, which could cause price declines in gold.
When the global economy continues to decline, it will be difficult for governments to invest in the stock market and continue to buy gold in the form of sovereign wealth funds and government bonds. According to the analyst Brian Kelly, with the value of the U.S. dollar plunging dramatically against other major currencies, the impact on gold is obvious.
“When individual nations have inflation rates that are under control, like they are today, it is easy to get more gold. But when the risk of inflation is there, and it will be there for some time, you don’t want to be gambling with your gold. And if you are a sovereign nation that’s got a lot of gold, then the risk of inflation is too high for you to take.”
No matter where you look, you will find a vast number of analysts who are worried about the stability of the U.S. dollar, and what that means for many important investor group. If you are an investor or speculator who has held gold for a while, you might feel that you are too close to the numbers to understand the crisis.
Don’t discount the advice of market professionals and financial experts on the state of the economy, or of Gold is a Great Investment. The price of gold is more correlated to the U.S. dollar, since the U.S. dollar keeps strengthening, but as you can see, the use of gold as a hedge isn’t over, and the price of gold has been going up recently.
In fact, many central banks and governments around the world are trying to sell their gold because they feel that they are losing confidence in the U.S. dollar. For the nations and central banks that are selling their gold, they may be able to sell it for more than what they are actually keeping, and in the short term, the money could go toward purchasing government bonds, instead of actually withdrawing cash from the banking system.
However, even those nations and central banks that hold sizable gold reserves, and hold a lot of dollars, are nervous because the stock market appears to be stabilizing and the United States Federal Reserve appears to be unwinding QE. At first glance, the situation looks quite ominous for them.
If you have invested in stocks, bonds, or some other type of market trading, you should expect that you might lose money in the short term, and that the performance of the stock market will revert to normal eventually. It is likely that stock market volatility will continue to rise in the coming months, as investors continue to be wary of the consequences of the stimulus plan being implemented by the Federal Reserve.
Central banks and governments around the world have also begun to use more than the official US dollars. Because the government is using legal tender currencies, its central bank is essentially printing paper money in order to finance the deficit spending of the US government and provide liquidity to financial institutions.
As gold prices remain down, this may make the situation worse, because the investors who sell gold are probably looking at the situation in terms of longer term, not short term. That means that although the dollar may rise in value temporarily, it will fall in value in the long term.